GOOG Considers China Withdrawal

By watching the reactions in the shares of Google (NASDAQ: GOOG) and Baidu.com (NASDAQ: BIDU), the market seems to think that a possible withdrawal from China by Google will have less effect on that stock compared to BIDU, which is rallying sharply, adding $45.00 to its share price or roughly $1.56 billion, while roughly $3.48  billion worth of market capitalization has been sucked out of GOOG’s stock today alone, with the stock down $11.00.

As soon as I was writing this, it seemed GOOG caught a bit of a bid and is now only down $8, which would equate to a loss of $2.5 billion in market cap.  The shares outstanding  differ greatly for the two, with GOOG at about 317 million and BIDU at 34.7 million.

So actually, GOOG is losing more market cap because of its larger float than BIDU is gaining in this instance.

BIDU could be potentially gaining the 80 million people per week that currently use GOOG’s search.

According to Bloomberg, Google’s China revenue is small relative to its nearly $22 billion in search revenue in 2008.  GOOG achieved revenue of two billion yuan ($293 million) in the third quarter of 2009, an increase of 28% over the prior year.   In that same quarter, Google had a 31.3% market share in China, versus Baidu’s 63.9%. All the other search engines control less than 1% of the collective market share.

China is the world’s largest internet user with more than 338 million active users (as of June 2009).  This compares to the 231 million-plus users here in the U.S. as of the end of 2008, according to the CIA.

All this stems from a direct and “highly sophisticated” attack on GOOG and at least 20 other companies’ systems, which came from China.  GOOG currently censors its content for distribution in China, but was looking to move forward without censorship, something that no other search company has done.  According to a blog by GOOG’s chief legal officer, David Dummond “GOOG has decided we are no longer willing to continue censoring our results”.

There are many sides to this story that could have political ramifications much larger than what is on the surface for both the people of China and Google, as well as the companies involved with GOOG and the ones that may want to do business with China in the future.

I continue to hold my ground  for the trade that I mentioned last week after the weakness in GOOG following the release of the Nexus One.  The trade is still $60.00 out-of-the-money and I believe that this pullback in GOOG may deepen slightly, but with the elevated volatility in GOOG today, the out-of-the-money put spread will increase in value, hurting our P&L. I will continue to evaluate GOOG as this story unfolds.  If GOOG does indeed close GOOG.cn, the shares could drop further, possibly another$10 to $20.

I personally don’t think we have seen the last of GOOG in China.

For more on Google and Baidu:

Google’s (GOOG) Nexus-One Phone Was Baked In

Sector Update: Technology Shares Mixed in Pre-Market Session – Google May Pull Out of China

BIDU: Trades for Option Bulls and Bears